Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:
A) "Putting all your eggs in one basket"
B) "Not in my own back yard"
C) "There ain't no such thing as a free lunch"
D) "You can lead a horse to water, but you can't make it drink"

Question

Quizplus · Accepted Answer

This situation is a classic example of the phrase "You can lead a horse to water, but you can't make it drink." The Fed has created excess reserves to encourage banks to make more loans, but the banks are not doing so because of poor economic conditions. The Fed cannot force banks to make loans, even if it creates excess reserves.

Assume the Fed Creates Excess Reserves in the Banking System